Quartz #33—>Don't Believe Anyone Who Claims to Understand the Economics of Obamacare

Link to the Column on Quartz

Here is the full text of my 33d Quartz column “Don’t believe anyone who claims to understand the economics of Obamacare,“ now brought home to supplysideliberal.com. It was first published on October 3, 2013. Links to all my other columns can be found here.

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© October 3, 2013: Miles Kimball, as first published on Quartz. Used by permission according to a temporary nonexclusive license expiring June 30, 2015. All rights reserved.

Below, after the text of the column as it appeared in Quartz, I have the original introduction, and some reactions to the column.  

Republican hatred of Obamacare and Democratic support for Obamacare have shut down the US government. Now might be a good time to remind the world just how far the country’s health care sector—with or without Obamacare—is from being the kind of classical free market Adam Smith was describing when he talked about the beneficent “invisible hand” of the free market. There are at least five big departures of our health care system from a classical free market:

1. Health care is complex, and its outcomes often cannot be seen until years later, when many other confounding forces have intervened.  So the assumption that people are typically well informed—or as well informed as their health care providers—is sadly false. (And the difficulties that juries have in understanding medicine create opportunities for lawyers to get large judgments for plaintiffs in malpractice suits.)

2. Even aside from the desire to cure contagious diseases before they spread, people care not only about their own health and the health of their families, but also the health of strangers. On average, it makes people feel worse to see others suffering from sickness than to see others suffering from aspects of poverty unrelated to sickness.

3. “Scope of practice” laws put severe restrictions on what health care workers can do. For example, there are many routine things that nurses could do just as well as a general practitioner, but are not allowed to do because they are not doctors–and the paths to becoming a “medical doctor” are strictly controlled.

4. Those who have insurance pay only a small fraction of the cost of the medical procedures they get, leading them to agree to many expensive medical procedures even in cases where the benefit is likely to be small.

5. In order to spur research into new drugs, the government gives temporary monopolies on the production of life-saving drugs—a.k.a. patents—that push the price of those drugs far above the actual cost of production. 

Sometimes these departures from a classical free market cancel each other out, as when insurance firms shield patients from the official price of a drug and make the cost of that drug to the patient close to the social cost of producing it, or when laws prevent outright quacks from performing brain surgery on an ill-informed patient. But one way or another, there is no obvious “free market” anywhere in sight. That doesn’t mean that the economic reasoning behind the virtues of the free market doesn’t help, it just means that when we think about health care policy, we swim in deep water.

At the level of overall health care systems, one of the most important things we know is that many other countries seem to get reasonably good health care outcomes while spending much less money than we do in the US. There are several factors that might contribute to relatively good health results in other countries:

  • There are large gains in health from making sure that everyone in society gets very basic medical care on a basis more regular than emergency room visits.
  • Most other countries have less of a devotion to fast food—and food from grocery store shelves that is processed to taste as good as possible (in the sense of “can’t eat just one”) without regard to overall actual (as opposed to advertising-driven) health properties.
  • Most other countries are either poor enough, or rely enough on public transportation, that people are forced to walk or ride bicycles significant distances to get to where they need to go every day.

Part of the recipe for spending less in other countries is the fact that they can cheaply copy drugs and medical techniques developed in the US at great expense, But, there are two simple ingredients to the recipe beyond that:

  • Ration procedures that don’t seem very effective (inevitably along with some inappropriate rationing as well)
  • Use the fact that most of the money for health care runs through the government as leverage to push down the pay of doctors and other health care workers.

My main concern about Obamacare is the fear that it will inhibit experimentation with different ways of organizing health care at the state level. So far that is only a fear, but it is something to watch for. But there is one way in which state-level approaches are severely limited: they can’t push down the pay of doctors and other health care workers without causing an exodus of doctors and other health care workers to other states. National health care reform can be more powerful than state-level health care reform if a key aim, stated or not, is to reduce the pay of doctors and other health care workers (and workers in closely connected fields, such as those who work in insurance companies) in order to make medical care cheaper for everyone else. Fewer stars would go into medicine if it paid less—but if most of the benefits from health care are from basic care, that might not show up too much in the overall health statistics. And if less-expensive nurses can do things that expensive doctors are now doing, those who would have been nurses will still do a good job if they end up becoming doctors because the pay is too low for the stars to fill the medical school slots.

Reducing the total amount of money flowing through the health care sector should reduce both the amount of health care and the price of health care. But even in a best-case scenario, in which reasonably judicious approaches to rationing and dramatic advances in persuading people to exercise and eat right kept the overall health statistics looking good, a reduction in the price and quantity of health care could mean a big reduction in income for those working in health care and related fields.

Still, the key wild card in judging Obamacare will be its effect on health care innovation. Subsidies may get people more care now, but crowd out government funding for basic medical research. Efforts to standardize medical care could easily yield big gains at the start as hospitals come up to best practice, yet that standardization could make innovation harder later on. An emphasis on cost-containment could encourage cost-reducing innovations, but discourage the development of new treatments that are very expensive at first, but could become cheaper later on. And Obamacare will tend to substitute the judgments of other types of health care experts in place of the judgments of business people, with unknown effects. Whatever the effects of Obamacare on innovation, we can be confident that over time these effects on innovation will dwarf most of the other effects of Obamacare in importance.

The October 2013 US government shutdown is only the latest of many twists and turns in the bitter struggle over Obamacare. A large share of the partisan energy comes from people who feel certain they know what Obamacare will do. But ideology makes things seem obvious that are not obvious at all. The social science research I have seen on health care regularly turns up surprises. To me, the most surprising thing would be if what Obamacare actually does to health care in America didn’t surprise us many times over, both pleasantly and unpleasantly, at the same time.

Here is my original introduction, which was drastically trimmed down for the version on Quartz: 

Republican hatred of Obamacare, and Democratic support for Obamacare, have shut down the “non-essential” activities of the Federal Government. So, three-and-a-half years since President Obama signed the “Patient Protection and Affordable Care Act” into law, and a year or so since a presidential election in which Obamacare was a major issue, it is a good time to think about Obamacare again.

In my first blog post about health care, back in June 2012, I wrote:

I am slow to post about health care because I don’t know the answers. But then I don’t think anyone knows the answers. There are many excellent ideas for trying to improve health care, but we just don’t know how different changes will work in practice at the level of entire health care systems.  

That remains true, but thanks to the intervening year, I have high hopes that with some effort, we can be, as the saying goes, “confused on a higher level and about more important things.”

One thing that has come home to me in the past year is just how far the US health care sector—with or without Obamacare—is from being the kind of classical free market Adam Smith was describing when he talked about the beneficent “invisible hand” of the free market. 

Reactions: Gerald Seib and David Wessel Included this column in their “What We’re Reading” Feature in the Wall Street Journal. Here is their excellent summary:

The key to the long-run impact of Obamacare will be whether it smothers innovation in health care — both in the way it is organized and in the development of new treatments. And no one today can know whether that’ll happen, says economist Miles Kimball. [Quartz]

(In response, Noah Smith had this to say about me and the Wall Street Journal.) This column was also featured in Walter Russell Mead’s post "How Will We Know If Obamacare Succeeds or Fails.” (Thanks to Robert Graboyes for pointing me to that post.) He writes:

Meanwhile, at Quartz, Miles Kimball has a post entitled “Don’t Believe Anyone Who Claims to Understand the Economics of Obamacare.” The whole post is worth reading, but near the end, he argues that the ACA’s effect on innovation could eventually be the most important thing about it’s long-term legacy…

From our perspective, these are both very good places to start thinking about how to measure Obamacare’s impact. Of course, Tozzi’s metric is easier to quantify than Kimball’s: it will be difficult to judge how the ACA is or isn’t limiting innovation. But that doesn’t mean we shouldn’t try: without innovation, there’s no hope for a sustainable solution to the ongoing crisis of exploding health care costs.

I have also been pleased by some favorable tweets. Here is a sampling: